Book Review: Lisa Servon’s ‘The Unbanking of America: How the New Middle Class Survives’

2 May 2017
By Carl Packman

I remember someone asking me once why I bothered with research looking at people without a bank account: there’s such a small number of them you may as well spend your time focusing on something else.

I replied that size doesn’t matter: given the fact that people who are totally excluded from the financial mainstream tended to also be highly represented by those in extreme poverty and destitution it was absolutely worth paying attention to.

But I also suspected naivety on their part as to the actual number of people without a bank account.

In the UK there are 1.71m people without a bank account, which is just 2.6 per cent of the population. While that looks small it is equal to the number of people who were unemployed in the last quarter of 2016.

Thankfully it’s politically unwise to say that this is too small a number for anyone to get worked up about.

94% of people without a bank account have a personal income of below £17,500 per annum, and 91% live in households where the total income is £17,500 per annum

55% are in council housing, while 24% are in the private rental sector

31% are between the ages of 20-29 and 26% between the ages of 40-49.

42.5% are recorded as saying they get to the end of every month without any money

Nearly 67% are either “very confident” or “fairly confident” using an online search engine for good deals on comparison websites

53% are either “very confident” or “fairly confident” using email and social media websites, and leaving feedback on shopping websites

44% use a smartphone

In the US, the number of people without a bank account is 25m which is just over 8 per cent of population, but that’s the same number of people who live “paycheck to paycheck” or who are unable to find full time work. It’s the same number of jobs Donald Trump wants to create to put “American workers first”. A relatively small number, but a very significant one never the less.

In the US, there is a lot more of a research focus on those people without a bank account. The Federal Deposit and Insurance Corporation (FDIC) conducts its biannual “National Survey of Unbanked and Underbanked Households” to assess the inclusiveness of the US banking system.

Lisa Servon, a professor of city and regional planning at the University of Pennsylvania, in her very interesting new book The Unbanking of America, goes a step further than carrying out a survey: she takes jobs with providers of alternative financial services, like payday lenders and cheque cashing shops, to get a first-hand look at the experiences of living without a bank account.

Servon describes her early memories of visiting the Pulaski Savings and Loan Association with her father “as part of his Saturday errand ritual”. She would then spend much of her Fridays after school with her mother as she cashed in her paycheque and deposit into a savings account.

Servon makes the point “the world has changed” now. “These days I do most of my banking online at odd hours” … “Today banks are bigger and more expensive to use, and their products are harder to understand. There’s a lot more fine print than there used to be”.

“The result”, she says, “Banks are now catering more and more to the well-off, leaving the rest of us to pay too much at banks or settle for imperfect alternatives such as check cashers and payday lenders”.

She diagnoses the problem by talking about contemporary forms of social and financial exclusion: the charges and fees to use mainstream financial services in the US, the existence of the so-called “new non-prime”, and the accessibility of non-credit information used towards credit decisions.

For example she mentions that fees are replacing interest as a catalyst for why banking is a barrier. She addresses the very hot topic of alternative financial services, saying that there is a logic, albeit an expensive one, for why people turn to high cost credit products like payday lenders when banks themselves are out of the reach of particular consumers.

Then she turns to a discussion on what Tim Ranney, the president and Chief Executive of Clarity Services in the US, calls the new non-prime, to describe the financial status of those who are part of the ‘gig’ or sharing economy, self-employed or what Guy Standing in the UK calls the ‘precariat’.

Servon also points out the potential downsides of the information revolution to discuss how different forms of data, rather than reducing risk for firms generates further reasons to exclude people.

To exemplify this she describes the landlord who google searches one of the women Servon is working with only to find that she’s been quoted in one of Servon’s articles about payday lending use. The woman, Ariane, insisted that Servon use her real name in the article, but because of this the landlord decided Ariane could no longer afford the rent payments.

This of course is a special example, but Servon is wise to how particular information floating around about us is being used in key financial decisions – to afford credit and to have a roof over our heads.

Servon doesn’t just detail the problem, but suggests some solutions as well. She’s very interested in the work of financial innovators, for example, who signal the possibility of providing services to consumers at a fraction of their existing costs. To this end she expresses enthusiasm for the UK Financial Conduct Authority’s Project Innovate.

As FinTech – portmanteau of ‘Financial’ and ‘Technology’ – becomes more consumer-focused the principles of financial health (the state of one’s own financial situation), particularly for the un- and under-served, must be a key focus. For this reason Servon is right to be optimistic about the potential of FinTech. But it’s not a success that’s guaranteed. It’ll need some steer from charities and other consumer organisations.

In any case this book explores the reality of financial exclusion from a very unique angle. From a research perspective it is both enviable and terrifically interesting. It’ll be very interesting to see what impact her new perspective has in the future for the financial services market.